OFCOM opens consultation into television advertising trading

Ofcom has opened a consultation into competition issues regarding the way in which television advertising is traded. In recent years there have been concerns that some of the particular features of television advertising trading are distorting competition in that particular market and Ofcom is now seeking views on whether it should make a market investigation reference to the Competition Commission.

Features of television advertising trading

At the moment advertisers generally buy television advertising from a broadcaster via a media buyer who negotiates the terms on which the advertising is bought. The advertising is sold by sales houses on behalf of the broadcasters, with larger broadcasters having their own sales house.

Contracts between the major media buyers and the major sales houses are usually negotiated on an annual basis. It is not the airtime itself that is bought and sold but “impacts”. An impact is measured in terms of the exposure of a particular demographic to an advertisement. The increased growth and wider accessibility of new television channels in recent years has led to a greater number of impacts and a corresponding fall in their price.

These negotiations tend to focus on a given share of broadcast (“SoB”) commitment by media buyers to sales houses and television channels. Media buyers are therefore unaware of exactly how many impacts they will receive for their SoB commitment when they enter into the contract. Media buyers enter into “agency deals” with the sales houses, i.e. an umbrella deal that is on behalf of all of their advertising clients rather than a separate contract for each client. Thus the SoB commitment made by a media buyer will in effect relate to all of its advertiser clients.

Ofcom has noted that by bundling advertising in this way, sales houses effectively control the delivery of impacts. Mass audience impacts are bundled with other impacts, week time impacts with weekday impacts and so on. The possible effect of this on competition is discussed below.

In the broadcasting market, ITV has the largest audience share across all demographic groups. This influences the way in which impacts are traded and media buyers often try to conclude negotiations with ITV before concluding negotiations elsewhere.

It is also important to note that owing to ITV’s dominant position in the market, advertisers can renew contracts with ITV with no extra price increase from 2003 levels. This is known as the Contract Rights Renewal (CRR) mechanism. Media buyers therefore stick with contractual terms with ITV that reflected the market in 2003 and therefore contracts do not fully reflect the changes in demand from advertisers that have happened since then. As it is difficult to have one trading mechanism with ITV and another trading mechanism with other broadcasters, contractual terms with all broadcasters have altered little since 2003.

Effects on competition

The effect that these features are having on the market has lead to Ofcom taking an initial view that there is a possibility that competition could be being distorted. Ofcom has identified three main ways in which this is happening: (i) a lack of transparency with pricing; (ii) bundling of airtime, and (iii) the trading model not keeping up with a changing market.

The fact that agency deals are often made annually can restrict advertisers’ ability to make a proper comparison of prices offered by different broadcasters during the course of the year. Media buyers also need to meet their SoB commitment leading to their ability to switch expenditure between different broadcasters being inhibited. Competition can be restricted as a result.

Ofcom point out that the competition issues that arise with the bundling of airtime can be demonstrated with ITV1’s dominant position in the market. Because of its strength ITV1 can bundle impacts delivered by its mass audience programming with the impacts delivered by other programming. Media buyers may therefore have to purchase more impacts on ITV1. This could lead to them purchasing fewer impacts on other channels. It can then become difficult for advertising revenues to be switched from one broadcaster to another. The other effect of bundling airtime is that a media buyer is more concerned with allocating advertising revenue that meets its SoB obligations with the broadcaster rather than reflecting what an advertiser is paying them for.

The consequences of the CRR mechanism outlined above has meant that alternative trading mechanisms have been difficult to achieve, as regulatory approval to remove the CRR would be required. The result is reluctance amongst media buyers to move towards new forms of television advertising which is preventing the market evolving with the changes that are happening in television e.g. the greater number of available channels, video on demand. This has not only been recognised by Ofcom, in recent months the House of Lords has called for removing the CRR.